* Bunds steady as market readies for French, Spanish supply
* German rally seen resuming, record high prices in sight
* Italy, Spain in demand as liquidity spurs yield hunt
By William James
LONDON, April 18 Debt sales due from Spain and
France put a cap on German bond prices on Wednesday, but
appetite for euro zone bonds was likely to remain high on
expectations of looser monetary policy and a hunt for yield.
The combination of increasing positioning for a European
Central Bank rate cut, along with an appetite to hold
lower-rated but higher-yielding debt has helped bonds across the
region to rally this week, with little sign of demand slowing.
"There's a bit of supply to contend with this morning so
that may put the brakes on things for now, but the way the
market has been trading we should press on here," a trader said,
predicting a medium-term drop in 10-year Bund yields
to 1.1 percent from their current 1.24 percent.
Demand for German debt was boosted on Wednesday by comments
from European Central Bank policymaker Jens Weidmann, who stoked
expectations that euro zone interest rates could fall if
economic data remains weak.
Bund futures fell 10 ticks to 146.14, but remained
within sight of the April 4 high of 146.54. A break above that
level would put the contract at its highest level since June
2012 - when Spanish borrowing costs were spiking in anticipation
Madrid would need a bailout.
Those fears have been calmed by the ECB's promise to
intervene in bond markets if needed, and a flood of liquidity
provided by central banks worldwide has helped support bonds
across the whole credit spectrum in the euro zone.
"There's just so much money out there, you're seeing a bid
for everything," said Lyn Graham-Taylor, strategist at Rabobank
"You're not seeing that simple risk-on, risk-off situation
where Spain and Italy do well and Bunds do badly, we're actually
seeing everything do well at the same time."
Italian 10-year yields dipped 3 basis points
to 4.23 percent, around 50 bps lower since the start of the
month, while Spanish yields fell by the same
amount to 4.67 percent, close to 14-month lows seen last week.
Spain and France were both due to issue debt later in the
session. Both offer higher yields relative to German debt and
are likely to draw solid demand.
"The market's persistent rally suggests these treasury
offices will have no problem getting investors to take their
paper," DZ Bank strategist Christian Lenk said in a note.
Analysts pointed to redemptions and coupon payments due from
France and Spain in the coming weeks as another factor
supporting the sales.
Spain will sell three-, five- and 10-year debt, targeting
between 4 and 5 billion euros, while France seeks up to 9.5
billion euros from sales of inflation-linked and nominal bonds.